Good day, and welcome to the QLogic Corporation first quarter fiscal year 2013 earnings announcement conference call. Today's conference is being recorded.

At this time, I would like to turn the call over to Jean Hu, Chief Financial Officer. Please go ahead.

Jean Hu

Thank you, operator. Good afternoon and welcome to QLogic's first quarter fiscal year 2013 earnings conference call. Joining me on the call today is Simon Biddiscombe, our Chief Executive Officer. I'll begin the call with a review of the first quarter financial results. Simon will follow with a discussion of the current state of our business. We'll then open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and our projections of our financial performance based on current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.

We refer you to the documents that QLogic files with SEC, specifically our most recent Forms 10-K. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our first quarter earnings press release issued earlier today, we reported both GAAP and non-GAAP results. All of the reference we will make on our call today relate to non-GAAP results unless otherwise stated. A reconciliation of the non-GAAP to the GAAP financial measures is available on our website under Investor Relations.

Turning now to our financial result. For the first fiscal quarter ended July 4, 2012. Our revenue in the first quarter was $130.4 million, compared to $144.5 million we recorded in the same quarter last year. This revenue was within our guidance range of $130 million to $135 million provided during our fourth quarter earnings call.

Our first quarter revenue from Host Products, which are comprised primarily of Fibre Channel, converged and 10-Gig Ethernet adapters, was $101 million compared to $108.9 million we recorded in the first quarter of last year. The state of declines is consistent of the way the trends that have been reported by majority of our customers.

First quarter revenues from Network Products which are comprised primarily of Fibre Channel switches was $19.5 million compared to $18.7 million recorded in the first quarter of last year.

Our first quarter revenue from Silicon Products, comprised of our Fibre Channel, converged, 10-Gig Ethernet and iSCSI chips, was $9.8 million and consistent with our expectations.

Our first quarter gross margin of 67.6% declined from 69.6% recorded in the first quarter of last year, primarily due to unfavorable product mix. Our gross margin was consistent with our guidance of approximately 58% provided during our fourth quarter earnings call.

Next, I would like to cover our first quarter operating expenses. As a reminder, we continue to invest in engineering in order to address increased opportunities and expand our share of the market while aggressively managing sales, marketing and engineering cost. Total operating expenses were $58.5 million, up from $55.3 million reported in the first quarter of last year. Operating expenses were consistent with our expectation. Engineering expenses in the first quarter of $35.1 million increased from $30.5 million last year.

Sales and marketing expenses in the first quarter was $16.9 million and decreased from $18 million last year. G&A expenses in the first quarter of $6.4 million decreased from $6.8 million last year. Operating income in the first quarter of $29.6 million was 22.7% of revenue. Interest and other income was $1.1 million in the first quarter.

Our income tax rate for the first quarter was 17.3%. Our first quarter income from continuing operations of $25.3 million represent a net profit margin of 19.4%. This represents the 68th consecutive quarter of profitability for QLogic.

Our first quarter income from continuing operations per diluted share of $0.26 was within our guidance range of $0.26 to $0.28 provided during our fourth quarter earnings call.

Turning now to our balance sheet. Our cash and the marketable securities were $496 million or approximately $5 per share at the end of the fourth quarter. $125 million was held in the United States. We continue to maintain our very strong cash position and have no debt. During the first quarter, we generated $27 million of cash from operations.

We remain committed to our stock buyback and during the quarter we purchased $57 million of the company’s common stock.

Receivables were $78.8 million at the end of the first quarter. DSO at the end of the first quarter was 55 days compared to 52 days at the end of the fourth quarter.

Inventory was $22.2 million at the end of the fourth quarter. Annualized inventory turns for the first quarter was 7.6 compared to 8.7 turns achieved in fourth quarter.

Turning now to our near term outlook. It’s clear that as we look forward to the remainder of fiscal 2013, and macroeconomic environment is increasingly insurgent. Fewer unit sales are falling short of analyst’s projections and our largest customers are clearly being more negatively impacted than the total market.

For the second quarter for fiscal year 2013, we expect revenue to be in the range of $115 million to $120 million and the gross margin to be in the range of 67% to 68%. We expect operating expense to be approximately $60 million, up from the prior quarter, principally due to a new compensation adjustment.

When combined the way the projected annual tax rate of approximately 18% and that diluted share count of approximately 95 million shares we expect to achieve non-GAAP earning per diluted share from continuing operations of $0.16 to $0.20 in the second quarter.

Actual results for future period may differ materially due to a number of factors, including those outlined during the course of this conference call, in our filings with the SEC and in the disclaimer statement at the end of our earnings press release.

I will now turn the call over to Simon. Simon?

Simon Biddiscombe

Thanks, Jean. In addition to my customary business update, it’s important to provide a more detailed commentary on the current economic environment within which our business operates and the impact we are seeing. It is now clear that IT spending in 2012 will not be as robust as previously forecast. Macroeconomic uncertainties have returned as major hurdles and there are more variables in play.

Server unit sales are falling short of analyst projections particularly across our traditional customer base. This shortfall is particularly pronounced in the government and financial verticals which represent approximately 40% of global IT spending and where our technologies have historically been highly adopted.

This is having a direct impact on our business which is highly correlated to the performance of the server market. Beyond servers, there has also been a softening of expectations for the storage market.

Despite these challenges during the fourth quarter, during the first quarter, we achieved revenue of $130.4 million and income from continuing operations per diluted share of $0.26. Looking forward, we remain committed to our strategy of Adaptive Convergence and we will continue to focus on execution.

Turning now to the business update. Our portfolio is one of the most comprehensive sets of high performance networking products available covering storage and local area networking, a diversity of protocols, variety of form factors, providing service, storage and Fibre connectivity.

The highly complementary technologies address our traditional core markets where we have enjoyed market leadership and expansion markets where we are well underway in establishing an important longer term presence.

Even with general economic activities slowing, new design customer activity continues with a wide range of traditional OEMs, ODMs, white box manufacturers and channel partners. The interest is standing on our multiprotocol adaptive convergence portfolio which offers customers the flexibility to power 16 Gig Fibre Channel and 10 Gig Ethernet networks including FCoE and iSCSI from the same hardware. The number of new designs we are pursuing and the success rate thus far is at an all time high creating an important pipeline looking programs.

While the initial wave of Intel Romley based demands are behind us, additional qualifications of our Adaptive Convergence host and switch products are progressing with leading server manufacturers. The products and the line of these qualifications are expected to come to market over the remainder of the fiscal year as we work closely with all of our partners.

A good example of the partnership activity we undertake with our OEMs is the recent announcement that we are the founding member of the HP ProActive Insight Architecture alliance. We were selected by HP for our networking solutions developed to the HP standards and interfaces that contribute to the industry transforming performance and reliability of HP ProLiant Gen8 servers.

As a founding member of the alliance, we will continue to contribute to the elimination of common caused by human to technology interaction that lead to system downtime and data loss. This architecture level partnership will pay longer term dividends with closer collaboration and innovative solutions,

Following our eight consecutive year of Fibre Channel adapter market share leadership in 2011, we announced in the quarter the published data from Dell'Oro Group confirms we again gained market share in Fibre Channel adapters for the first quarter of the calendar year 2012. Our revenue share for the quarter rose to more than 57%, a 3.6 point gain resulting in a solid lead to more than 20 points.

Demand for our storage area networking products continues to be solid and the end users continue to demonstrate a strong preference for the same supplier in ongoing Fibre Channel purchases when they move to converged networking products.

Last quarter, I shared with you an important development about our interest focus and emphasis on the market for protocol ASICs for storage systems which we call the target ASIC market. Active programs continue to progress for this market and key to the opportunities, the flexibility of our current generation of products which can power 16 Gig Fibre Channel and 10 Gig Ethernet networks include an FCoE and iSCSI from the same hardware.

We have key target design wins with the loading storage vendors in the market whose block and NAS level storage subsystems represented the vast majority of revenue for the external controller based disc market during calendar 2011.

Our goal remains to become the market leader for Protocol ASICs for storage systems, a market we estimate to be in excess of $100 million this year and growing consistent with the growth in storage systems.

And now, public validation of one of the many new design wins we have in the storage systems connectivity market is the recent announcement that our 8200 Series third-generation 10 Gig converged networking adapter technology, were shipping as an embedded target controller solution in Fujitsu’s ETERNUS Storage Systems. We are engaging and winning storage systems connectivity business with our entire host, switch and router portfolio across a wide range of customers.

Even with the backdrop of near term economic uncertainty, we look through the longer term and are actively planning and developing next generation products for current and new markets. We will continue to stay focused on the technology and capabilities to address the next generation needs driven by trends in cloud computing, big data, Web 2.0 and the enterprise data centers.

As noted in the last call, we will also shortly be deploying highly innovative new products which solve significant data center problems and will result in increased available markets. These exciting products are unlike anything we have previously undertaken and represent promising new expansion opportunity. A public announcement on this topic will be forthcoming shortly.

The entire QLogic management team is focused on providing the highest value products to our customers with strong optimism for the track we are on and the potential the future holds. We are all committed to drive future growth for QLogic.

That concludes our prepared remarks. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Thanks, Simon. First question, if you can talk a little about the September guidance. Obviously weaker than anticipated but can you help us understand the various segments and in particular how you are looking at where we are at in terms of the Romley cycle right now and how we should think about modeling the host business, both in the September quarter and any kind of initial thoughts looking into December?

Simon Biddiscombe

We are clearly pointing to a general weakness in the parts of the server market where we have historically played most significantly, Aaron, and if you look at the Gartner numbers that were published a couple of days ago, and you look at the service shipments and the change in service shipments on a year-over-year basis from our biggest customers, clearly that’s way off the expectations that people had and that we had as we looked forward over the remainder of the year.

So as we look at incredible amount of detail, the underlying trends in the business at this point in time, we are actually not concerned about things like rates of a attach of Fibre Channel, rates of a attach of 10 Gig E, although that appears to be ramping a little more slowly than people expected it to, as got Romley delayed and as people tend to deploy next generation technologies a little more slowly through tough economic times.

We are not concerned about fundamental quality of the business. We are very concerned about the underlying server market and very specifically the key customers that have been QLogic’s revenue streams over the course of many years.

Aaron Rakers - Stifel Nicolaus

Okay, so I guess, I will ask another way. Are you assuming, that the mid high single digits sequential decline in the host business this quarter and if I look back, historically December quarter, what’s the typical seasonality in December quarter for that host business and what’s your assumption?

Simon Biddiscombe

Still we are not guiding the December quarter at this point in time, Aaron. I think we always see a benefit. There is not doubt about it and typically we talk about the seasonal benefit being somewhere around 8% to 10% kind of number and we are not betting against a traditional seasonal period at this point in time, right. I don’t want to give you the impression that we are not expecting some degree of seasonality in the December quarter but what we are concerned about is the current trend we are seeing across that major set of customers.

Aaron Rakers - Stifel Nicolaus

Thank you, all right.

Operator

We will take our next question from Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Thanks a lot, guys, good afternoon, guys. Maybe just given the fact that you are seeing the revenue declines and the other concerns that you guys outlined on the macro side, why not take aggressive steps to adjust the OpEx structure so you can have a better operating margin?

Simon Biddiscombe

It’s a great question, Amit, and something we are scratching our heads on, obviously. I think what we recognize is that if you believe that this is a near term macro driven phenomenon, then you would react differently than you would if you believed that this was some kind of long term systemic trend.

We believe that this is a near term macro driven factor at this point in time and when we look at the level of design activity that’s ahead of us, when we look at the trends around the next generation converged technologies, 10 Gig Ethernet and some of the other products that we have got forth coming over the coming quarters, the need to continue to invest is something that we are very comfortable committing to at this point in time and we will continue to squeeze like crazy on the sales and marketing line and G&A.

You can see on a year-over-year basis, those are both down and all of the investment that we are making is in engineering in order to bring new solutions to market and to be able to enable our customers with critical next generation technologies.

Amit Daryanani - RBC Capital Markets

I guess, Simon, if you look at the revenue mix you have right now, and all the new opportunities you looking forward, what’s the revenue run rate or what’s sort of dynamics would you need to get back to your target model at this point?

Simon Biddiscombe

Funny, it’s all about revenues, right. I mean we are comfortable with the spend level at $60 million given where we are from a model perspective, right. So if we believed, Amit that the revenue level was going to stay at somewhere around $120 million number, then clearly we would rethink the model.

We are not at a point where we think that’s a sustainable revenue stream. We are saying it’s attributable to the underlying server markets, specifically across a subset of our customers at this point in time.

So we are not throwing in our towel on the model. What we are saying is that you have got near term macro pressures on the server market that is clearly impacting us. We have got to invest against that at this point in time and if revenues don’t recover the way we expect them to, then clearly we will deal with the operating expense structure at that point in time.

Amit Daryanani - RBC Capital Markets

Again, Simon, I guess, to make sure, the new opportunities that you have, the new revenue that is coming will be comparable gross margin?

Simon Biddiscombe

Yes, absolutely.

Amit Daryanani - RBC Capital Markets

I will take it offline from here. Thanks a lot.

Simon Biddiscombe

Al right, thanks.

Operator

We will take our next question from Mark Moskowitz with JPMorgan.

Mark Moskowitz - JPMorgan

Thank you, good afternoon. Simon, can we come back to the discussion you had earlier with Aaron around, you are not concerned about attach rates, this is more of a near term macro issue. So for the (inaudible) there would be some indications out in the market and (inaudible) said, we are hearing more and more about (inaudible) for some of the Ethernet and if anything, then base solution is displacing some of the legacy Emulex and QLogic solution. So can you just kind of weigh in on, does that have an impact here as well, or hopefully it’s all macro?

Simon Biddiscombe

No, we are not seeing it having an impact at this point in time. I have got the general manager of the business next to me and he is shaking his head as well. We don’t see that here. We see InfiniBand technology is being used in very different ways than Fibre Channel technology has. We were close to those opportunities when we had the InfiniBand business, obviously but I had never looked at those as being replacement as InfiniBand opportunities replacement of Fibre Channel.

That’s not what we see as being the secular trend. We do see use cases for InfiniBand in the storage market but not as a network connectivity as a protocol that is used for scale out. So we don’t see that. That’s not the trend and when we look at the attach rates, Mark, and we do an incredible amount of detail, when we look at server attach rates for Fibre Channel across that major set of customers that we have served so well for so many years, we are very consistent.

When we look at the attach rates to Fibre Channel across the servers at HP and IBM, there isn’t any concern about those attach rates. That’s part number one.

Part number two, clearly there is no share problem. We actually had 57% market share in the March quarter. So we are not concerned about attach rates and we are not concerned about our share within that position at this point in time.

Mark Moskowitz - JPMorgan

Okay, I appreciate that and then maybe you can help us understand how we get to the guidance because it does seem to be pretty sharp fall off relative to all of our expectations. What was the linearity like in the June quarter? Can you talk about that shape and just how bad?

Simon Biddiscombe

June model is a little bit more back end loaded than certain other quarters have been, Mark. Now, I think that was partially attributable to the fact people were probably waiting for Romley service throughout the course of the quarter and as those got launched over the course of the quarter, there was probably more activity toward the end than there was at the beginning of the quarter but my expectation is that you are going to continue to be pressured from a server perspective, specifically across our biggest customers, right.

Now, you have got our biggest customers. You look at the Gartner data. One of my biggest customer was down 6%, one of my biggest customers was down 16% on a year-over-year basis, right. That clearly gives me significant concern when it comes to our ability to drive incremental activity through the business.

So maybe at the end of the day, we will have proven to have been cautious in how we have provided the guidance for this period but I feel that this is probably reflective of the trends we are seeing at this point.

Mark Moskowitz - JPMorgan

Understood, and just one last question if I could.

Simon Biddiscombe

Yes.

Mark Moskowitz - JPMorgan

Can you remind us, as far as these new product introductions later this year, is there going to be something that can offset the host volatility? Is it going to be completely different type of go to market?

Simon Biddiscombe

No, it’s a very consistent go to market, if you want to think about it that way and it, theoretically, is a host based solution kind of thing. So with that we shouldn’t give you too much detail. It will be part of, depending on how we are characterizing revenues host.

Mark Moskowitz - JPMorgan

Okay, thank you.

Operator

We will take our next question from Keith Bachman with Bank of Montreal.

Keith Bachman - Bank of Montreal

Hi, thank you. I have two questions. Number one, Simon, you talked about share, I was just wondering if you could specifically address share within the Ethernet or Fibre Channel over Ethernet side and give us your perspective on where you stand not only in the current quarter, but also how you anticipate share in that side of business unfolding in September and then the second half of the year?

Simon Biddiscombe

Let me do that one first.

Keith Bachman - Bank of Montreal

Fair enough.

Simon Biddiscombe

So if you look at historically, if you look over the course of the extended period where the FCoE solutions have been in the market, typically, FCoE share has tracked FC share. So for an extended period of time, the kind of the non captive number has tracked the Fibre Channel number. So we have been in the mid 50s, typically, for our share in FCoE versus FC and then if you go back to the most recent published information, we took over that number two position in all 10-Gig Ethernet but that does not include FCoE in the middle of last year and we had sustained that all the way through the end of the calendar year.

So, we didn’t make reference to it in the prepared remarks. Revenues in 10-GigE and converged did actually grow sequentially. We do expect it to grow again in the current period, okay. So I don’t want to give you the impression that any part of what we are seeing is specifically attributable to the 10-GigE or converged part of the business. Those do continue to grow. They did in the June quarter and our expectation is that they will again in the September quarter.

So we are comfortable with the activities around there.

Keith Bachman - Bank of Montreal

Okay, any dimension?

Simon Biddiscombe

I thin what you will see, though, Keith, some puts and takes are in that and I think we do believe that people ramped up demand ahead of Romley and I think certain people probably got revenue pops ahead of Romley and maybe a little slower. It doesn’t have a nice consistency to it at this point in time would be the right way to say it.

But we are seeing growth from period-to-period.

Keith Bachman - Bank of Montreal

Okay, any dimensions on the growth sequentially? That’s my second question.

Simon Biddiscombe

No.

Keith Bachman - Bank of Montreal

Okay. If I look at the guidance, can you just speak to address, has there been any change to pricing and/or, same question asked a different way, are gross margins by the various product categories staying consistent in the September quarter as in the June quarter or is there some degradation across the gross margins.

Simon Biddiscombe

No change in ASPs. No change in the assumptions.

Jean Hu

The gross margin is very consistent across different product lines.

Keith Bachman - Bank of Montreal

Okay. That’s it from me. Thanks very much.

Operator

We will go next to Paul Mansky with Cantor Fitzgerald.

Paul Mansky - Cantor Fitzgerald

Thanks for taking the question. Simon, we are recognizing, obviously the Gartner numbers being thoroughly server, particularly with respect with yours or your customers have higher concentration. Can you tell us are those numbers putting versus the bill book plans you are getting from those customers or you are looking at those numbers themselves?

Simon Biddiscombe

I would never comment on that, Paul. When I look forward, and don’t forget those Gartner numbers we were talking about historic numbers, right. So they were Q2 numbers. We would never comment on bill plans from individual customers. That would inappropriate.

Paul Mansky - Cantor Fitzgerald

Maybe let me ask it slightly different way.

Simon Biddiscombe

Okay, let me answer it differently. Let me say the following, okay. We give consideration to many factors as we think through how we provide guidance and one of those factors is the bill plans that we receive from our customers, right.

Now, other factors that we give consideration to are things like the macroeconomic environment, there is things like IT spending forecast, there is things like whether we expect to see specific product cycle benefit a significantly or detrimentally in any individual period. Its things like the backlog we have today versus order trends that we are seeing at this point in time.

So our customers forecast activity is one of the inputs into it but there are many other inputs that we put into the guidance obviously.

Paul Mansky - Cantor Fitzgerald

Okay, and you kind of touched on it, but I will ask a bit more directly. As you think about your four year forecast, are you assuming a stable market share in the traditional Fibre Channel business?

Simon Biddiscombe

Absolutely.

Paul Mansky - Cantor Fitzgerald

Okay, that’s great. Thank you very much.

Simon Biddiscombe

Thanks.

Operator

[Operator Instructions] We do have a question. We will take our next question from Rajesh Ghai with ThinkEquity.

Rajesh Ghai - ThinkEquity

Yes, thanks. Simon, you mentioned that server numbers are not that great. You also mentioned that Fibre Channel is not being replaced by InfiniBand, which I think is right, but what I wanted to ask you was, given that on the Fibre Channel side, you have not had a bandwidth upgrade, say, move from 8-Gig to 16-Gig to grow with the Romley cycle. Is that handicapping the Fibre Channel HBA market more than say, 10-Gig or InfiniBand, maybe and do you feel pressure and is that the reason why you are probably not seeing any benefit from the server?

Simon Biddiscombe

I don’t know, Rajesh. I don’t think so. I still think the rates of adoption of converged technologies in particular have relatively low fix point in time and we have talked about why we believe that to be the case for an extended period of time. So when you think about FCoE, the adoption rates generally are still relatively low.

The reason you didn’t have 16-Gig qualifications with the Romley process is that people expected to be shipping Romley based solutions last year and there weren’t 16-Gig solutions in the market at the point last year and certainly the quals wouldn’t have been done by the time people expected to be shipping those solutions.

We will all be shipping 16-Gig solutions imminently and I think you will see a benefit from the transition to 16-Gig but 4 to 8 took an extended period of time in a tough macroeconomic environment, right.

If the macroeconomic environment continues the way it is today, I would expect the 8 to 16 to be tough transition as well. I think you can see that to a certain extent from the fact that there is actually very little 16-Gig shipping at this point in time.

When I look at the levels of 16-Gig that are shipping from my major customers, its very, very small indeed.

Rajesh Ghai - ThinkEquity

When are you expected to ramp? Will it be next year?

Simon Biddiscombe

Its next year. I think it stops at ramp. We originally late 2012 when we expected Romley based service to be shipping a lot earlier. I think fact that the Romley have taken longer to get to market has resulted in all of the crawl cycles taking longer to get done for 16-Gig and I think the ramp will truly be in 2013, not ’14. It will be ’13, assuming the macro environment is conducive to people buying the technology.

Rajesh Ghai - ThinkEquity

And the uptick that you saw in R&D, is that all related to 16-Gig Fibre Channel?

Simon Biddiscombe

It is all kinds of things. That sort of has the 16-Gig Fibre Channel, there is 10-Gig Ethernet, there is converged solutions, the target market. There is new ASICs coming to market and then there is the switch business where continue to invest aggressively and there is also the new product that we will be launching here imminently that results in dollars as well.

Rajesh Ghai - ThinkEquity

Okay, and my last question, as far as your guidance is concerned, are you expecting a step down and in all your three segments or is it mainly going to be in the HBA side?

Simon Biddiscombe

We didn’t break it out. So we are going to stay clear of providing detailed guidance by product family at this point in time, Rajesh.

Rajesh Ghai - ThinkEquity

All right, thank you so much.

Operator

We will take our next question from Bill Shope with Goldman Sachs.

Bill Shope - Goldman Sachs

Okay, great, thanks. You mentioned earlier that you didn’t think you would need to cut OpEx if this is potentially just a shorter term cyclical issue. What signs would you look for to tell your view towards this thing in a more systemic problem as opposed to just a macro issue or perhaps the possibility that it’s a bit of both. How are you thinking about that?

Simon Biddiscombe

I would characterize this having it on a fairly short leash at this point in time, Bill. So my expectation is that if we are dealing with the macro issue we will start to see that hopefully unwind over the course of the coming periods and as I said, my expectation would be that I have been appropriately cautious in the guidance we have provided for the current period and then we will set ourselves up for a traditional seasonal December quarter.

But we have got it on a short leash. We are going to keep an eye on it over a very short period of time and determine what to do based on that.

Bill Shope - Goldman Sachs

Okay, and then earlier you commented on gross margin stability why wouldn’t there be incremental pricing pressure given that your customers are facing what appears to be pretty pronounced macro and margin challenges and that potentially could increase now. Why isn’t there risk that you wouldn’t have to seek some on price?

Simon Biddiscombe

There is always risk, right. There is ASP risk and we are always willing to engage with our customers around specific transactions where they may need assistance on certain levels of activity, right.

So not every, HBA is sold at the same ASP even across the same set of OEMs and what we do a very good job of continuing to squeeze cost out of the business as well, right, so we protect the margin by continuing to squeeze cost out at rates that are entirely consistent with the rates of ASP erosion that we have historically seen.

So I don't want to give you the impression that we don't do deals that result in pricing being a little different than that just regular traditional ASP erosion that we've seen, but we do a very good job managing the cost side of the product as well and that allows us to protect the margin.

Operator

We will now go to Scott Schmitz with Morgan Stanley.

Scott Schmitz - Morgan Stanley

Hi, Simon. Hi, Jean. I am just trying to figure out a reconcile of the more bullish comments from Intel, so maybe can you just help me understand the Romley based server availability in the enterprise versus the shipment for the cloud?

Simon Biddiscombe

Yes. So there is one of the issues, right? So, when you look at what people have said about the server market generally, Intel does standout as being the one who is far more bullish than other participants in the market, and I think you hit the nail on the head. There's tremendous amount of activity that Intel is seeing in HPC, in particular.

So, they quote that, I think, HPC as being the strongest market at the base of it. Obviously that's not a market, but it's served by Fibre Channel or 10-Gig Ethernet technologies in any significant way at this point in time.

Then to your point, they called cloud and a tremendous amount of cloud continues to be a 1-Gig world as opposed to 10-Gig world. So if you look at the Intel commentary and you look at the specific markets that they call that is being relatively strong. They are not markets that we would have historically served with either Fibre Channel or 1-Gig based technologies.

Scott Schmitz - Morgan Stanley

When does that transition from 1-Gig to 10-Gig?

Simon Biddiscombe

It's undoubtedly started, right? When we engage with the Taiwanese ODMs who are calling on cloud customers, cloud Web 2.0. When we engage with our OEMs, who are calling on that side of customers and then frankly when we call on those customers directly. We have got real time examples where we are called where we are engaged with some of the very biggest names in Web 2.0 and cloud and providing them very specific technology that is 10-Gig based. So the transition has already started to occur, but the vast majority of what is going down is still 1-Gig number at this point in time.

Operator

There are no other questions at this time. I'd like to turn the conference back to Jean Hu for closing remarks.

Jean Hu

Thank you. That concludes our call for today. As a reminder, we'll be hosting our upcoming analyst at NASDAQ, in New York office. Day, September 6, and we look forward to seeing many of you there. Thank you so much and good bye.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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